Avoiding Hidden Threats To Your Security

Some of the most serious threats to financial independence are often overlooked. Yet a few simple actions can avoid large losses from these risks. In addition, you can reduce substantially your out-of-pocket expenses when you pay attention to these neglected issues.

The sad fact is that the insurance coverage for most people is wrong. People are paying too much for too little coverage or for coverage they don’t need. Significant portions of their net worth are at risk from events or lawsuits. The insurance decisions during and near retirement are some of the most important and complicated in your lifetime. It doesn’t take much to turn a financially secure retirement into something far less appealing. Most people obtain insurance coverage fairly early in their adult years and don’t update it much after that. Take a fresh look at insurance as you near or are in retirement. You’ll see opportunities such as these to close gaps and reduce your cost.

Consider increasing your deductibles. You aren’t a struggling young adult with a family. You don’t need a low deductible to prevent a loss from depleting your savings. When you have a healthy income and net worth, consider increasing deductibles on your home and auto policies. This will reduce premiums, usually by enough that about three years of lower premiums will make up for the higher deductible if you should incur a covered loss.

Check discounts. You might not know all the discounts the insurer offers, and the insurer might not know all the qualities that qualify you for discounts. Often-overlooked sources of discounts in home insurance are the installation of a security system and upgrading basic systems such as electrical, plumbing and heating. The insurer or agent should be able to give you a full list of potential discounts, or you can talk with him about discounts.

Save by bundling. There’s no doubt that bundling more than one type of insurance with one company saves money. Even when an insurer doesn’t offer the lowest premiums on separate policies, bundling can shrink the gap. Don’t let premiums alone drive your decision. You want good claims service, good coverage and a financially stable insurer. After that, look for opportunities to reduce premiums.

Ensure full coverage for the home. Many of my readers lived in the same homes for a long time. Often, that leads to significant insurance-coverage gaps. Most likely, the coverage limit isn’t high enough to cover a catastrophic loss. That’s because the cost of rebuilding all or most of the home exceeds the market value. Be sure your policy covers full replacement cost, not market value.

A related gap is tied to building-code updates. Localities regularly update building codes, increasing the requirements and costs for new homes. But if you have work done on an older home because of either an upgrade or repairs after a catastrophe, large portions of the home might have to be upgraded to meet current code requirements. This can be a significant cost to fix a home after a catastrophe, especially if you have older electric and plumbing systems. Your homeowner’s policy needs to cover any changes required to meet current building codes, or you’ll have to pay the extra cost.

When you belong to a homeowner’s association, you might want significant assessments from the HOA covered. When the HOA isn’t covered for a major loss to community property, loses a lawsuit or has to upgrade a facility because the law has changed, the HOA will assess homeowners for the costs. The potential for this is especially high in condominium communities, but it is possible for all HOAs. At times, special assessments are thousands of dollars.

Protect personal assets. Homes owned by older people are likely to have inadequate insurance for their contents. The standard insurance policy assumes contents are a certain percentage of the home’s value. But older owners tend to have more things and more valuable things than the average, because the average includes a lot of younger people. Your best move is to take an inventory of your home’s contents and compare that to what the insurance would pay if it were destroyed. When the gap is substantial, talk with your insurance agent about your options.

Of course, there are many personal items that are excluded from the contents coverage. These include antiques, jewelry, collectibles, furs, antiques and a lot of electronics. Make a list, obtain an appraisal of their values when necessary and buy a rider to your policy that covers them.

Some assets require special coverage. For example, if a few years ago you bought that car you drove or envied in high school, that’s now a classic car and could require a special policy instead of a standard automobile policy.

Be sure titles are correct. As part of your estate plan, you might have shifted some of your assets to a living trust or a limited liability company. Be sure these items are covered by your insurance. You don’t want to suffer a loss and discover it isn’t covered because legally you no longer owned the car or home.

Do you have a new business? Some people turn their hobbies into businesses during retirement. That could create a new list of potential liability claims. You might be able to cover these under the personal umbrella liability policy, or you might require separate insurance. Be sure you’re covered.

Check directors’ and officers’ liability. One of your activities might be to serve on the board of some organization. It might seem harmless and good community service to serve on the board of, say, a local youth sports league. But what if one of the coaches made sexual advances to some players, and the parents sue the league, including the directors? Being on the board of any organization opens up the potential for personal liability suits. Even if the suit is frivolous, you need to pay a lawyer. Be sure the organization has sufficient insurance to protect its officers and directors. If it doesn’t, buy your own policy.

Cover it all with an umbrella. Anyone with significant assets should have a personal liability umbrella policy. Your homeowner’s insurance covers you for liabilities from a range of actions by you, your family members and even your pets. But there’s a ceiling to the coverage, and it likely isn’t enough to protect you in today’s litigious world. A personal umbrella liability policy is very inexpensive. You probably should have at least $5 million of liability coverage.

The insurance coverage discussed above is in addition to the medical expense and long-term care coverage that should be basic parts of a retirement plan.

Now that most of your earning years are past, one of the greatest obstacles to lifetime financial security is having a significant portion of your nest egg taken by a catastrophe or liability suit. Combine the cost-saving measures with the strategies for boosting coverage. The combination likely will provide you greater protection than you have for premiums that are similar to or less than what you’re paying now.

—Bob Carlson

Bob Carlson is editor of the monthly newsletter and web site, Retirement Watch. Carlson is Chairman of the Board of Trustees of the Fairfax County Employees' Retirement System, which has over $3 billion in assets, and was a member of the Board of Trustees of the Virginia Retirement System, which oversaw $42 billion in assets, from 2001-2005. He was appointed to the Virginia Retirement System Deferred Compensation Plans Advisory Committee in 2011.
His latest book is Personal Finance for Seniors for Dummies, published by John Wiley & Co. in 2010 (with Eric Tyson). Previous books include Invest Like a Fox... Not Like a Hedgehog, published by John Wiley & Co. in 2007, and The New Rules of Retirement, as published by John Wiley & Co. in the fall of 2004.
He has written numerous other books and reports, including Tax Wise Money Strategies, Retirement Tax Guide, How to Slash Your Mutual Fund Taxes, Bob Carlson's Estate Planning Files, and 199 Loopholes That Survived tax Reform. He also has been interviewed by or quoted in numerous publications, including The Wall Street Journal, Reader's Digest, Barron's, AARP Bulletin, Money, Worth, Kiplinger's Personal Finance, the Washington Post, and many others. He has appeared on national television and on a number of radio programs. He is past editor of Tax Wise Money.
Carlson is an attorney and passed the CPA Exam. He received his J.D. and an M.S. (Accounting) from the University of Virginia and received his B.S. (Financial Management) from Clemson University. He also is an instrument rated private pilot. He is listed in several recent editions of Who's Who in America and Who's Who in the World.

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